Definitions of disability, elimination vs probationary periods, the rider shelf, business uses, and follow-the-dollar taxation.
Before you read — prime your brain
Take a shot at these. Being wrong here is the point — it primes you for the answers, which are all in this lesson.
A surgeon injures her hand and can no longer operate, though she could teach medicine. Her policy pays because she cannot perform the material and substantial duties of her specialty. Her policy uses which definition of disability?
Noted — the answer comes up in this lesson.
The elimination period in a disability policy functions as
Noted — the answer comes up in this lesson.
In an AD&D rider, the capital sum is paid for
Noted — the answer comes up in this lesson.
Primed. Read on — then finish the lesson to see how you did.
Disability insurance protects the paycheck — the asset everything else in a financial plan depends on. The exam hits this chapter from four angles: WHICH definition of disability applies (own-occ, any-occ, SSDI's 'gainful'), the timing machinery (elimination vs probationary periods, recurrent relapses), the rider alphabet (FIO, COLA, SIS, AD&D), and who pays tax on benefits. Learn each definition by who would still qualify under it.
Basics: Perils, Occupational Coverage & STD/LTD
[2]
Disability income insurance replaces earned income lost to accident or sickness — restoring, never enhancing. Occupational coverage (individual policies) protects 24/7 and pays in full alongside workers' comp; non-occupational coverage (group plans) excludes work injuries and is coordinated with social insurance. STD pays weekly for up to two years after minimal waits; LTD pays monthly for two years to age 65 behind longer elimination periods.
Individual = occupational, not coordinated. Group = non-occupational, coordinated. That single contrast answers several exam questions.
Check yourself
Which concept does this describe? Replaces a portion of earned income when accident or sickness prevents the insured from working — a specified benefit for a defined period. Restores economic position; never enhances it (total benefits can't exceed lost income).
How sure are you?
Check yourself
Which concept does this describe? Occupational = covers on AND off the job, 24/7 (typical of INDIVIDUAL policies, which do NOT coordinate with workers' comp). Non-occupational = excludes work-related losses (typical of GROUP plans, which are coordinated with — reduced by — workers' comp and Social Security).
Own occupation — can't do YOUR job (generous, pricey, often converts after 2 years) — versus any occupation you're reasonably suited for, versus Social Security's brutal 'substantial GAINFUL activity.' The loss-of-earnings test looks at earned income only (≥20% drop). At-work benefits: partial disability (flat 50% of the total benefit) and residual disability (proportional — the income-loss % applied to the benefit). Presumptive disability (double dismemberment, sight, hearing, speech) skips every test; the recurrent provision makes a relapse within 6 months a continuation, and concurrent/delayed/confining round out the definitions.
Residual math trap: a 60% income loss pays 60% OF THE BENEFIT, not 60% of income. And 'gainful' in a question = Social Security's definition.
Check yourself
Which income counts under a loss-of-earnings test?
How sure are you?
Only EARNED income counts — wages, salary, commissions, fees. Passive income (rent, interest, dividends) never does.
Check yourself
The standard partial disability benefit equals
How sure are you?
Assume 50% of the total disability benefit, flat — paid when the insured can't perform one or more key duties or can't work full-time.
Elimination = every claim. Probation = once, sickness only, accidents covered day one. The exam swaps these words constantly.
Check yourself
During a disability policy's probationary period, the policy covers
How sure are you?
Accidents only — the one-time period at policy start excludes sickness to block applicants already incubating an illness. Accidents are datable; diseases hide.
Check yourself
Insurers typically limit individual disability benefits to about what portion of gross earned income?
How sure are you?
~60% of gross (or 80% of net) — the gap keeps recovery and work more attractive than staying on claim.
AD&D pays the principal sum for accidental death and the capital sum (50%) for dismemberment. The social insurance supplement pays when SSDI/workers' comp is delayed, denied, or short. The future increase option buys more coverage later without medical proof (income must rise; use-it-or-lose-it), while the COLA rider inflates benefits already on claim. The rest of the shelf: AMB (first 6–12 months), lifetime extension, hospital confinement (extra daily benefit + waives elimination), return of premium, rehabilitation, non-disabling injury, and waiver of premium — standard in health contracts.
FIO vs COLA: FIO grows coverage BEFORE a claim; COLA grows checks DURING one. Principal = death, capital = limbs.
Check yourself
Which concept does this describe? Indexes benefits already being paid on a claim to the CPI (adjusted each disability anniversary, often capped ~5%). LTD policies only; kicks in after benefits have been received for a year.
How sure are you?
Check yourself
Which concept does this describe? AMB: extra benefit for the first 6–12 months (covers the SSDI wait). Lifetime extension: benefits past 65. Hospital confinement: extra daily benefit + waives elimination while hospitalized. Return of premium / cash surrender value: refunds premiums for favorable claims history / at 65 minus benefits. Rehabilitation benefit: insurer pays vocational retraining. Non-disabling injury (medical reimbursement): pays medical costs of an accident injury that doesn't disable. Waiver of premium: standard in health contracts — premiums waived during disability. Impairment waiver: permanently excludes a named condition.
Business overhead expense reimburses the firm's actual operating costs (rent, utilities, wages) while the owner is disabled — never the owner's income. Disability buy-out policies fund buy-sell agreements (cross-purchase n×(n−1) vs entity), pay lump sums, and carry elimination periods up to two years. Key person DI pays the business for a disabled key employee's economic value. Credit disability pays the CREDITOR the loan installments — a decreasing-term design.
Four products, four wallets: BOE → the business's bills · buy-out → the departing owner's shares · key person → the firm's lost value · credit → the lender.
Check yourself
Under a credit disability policy covering Tom's auto loan, who is the policy owner and beneficiary?
How sure are you?
Credit disability protects the lender: the creditor is both owner and beneficiary, and benefits pay the loan directly. Tom is merely the insured who typically pays the premium — picking the borrower is the classic wrong answer.
Check yourself
Business overhead expense insurance covers all of the following EXCEPT
How sure are you?
BOE keeps the business running — it never replaces the owner's income (that's the owner's personal DI policy). It reimburses actual expenses up to a monthly max.
Group DI pays 50–70% of wages (auto-adjusting), STD then LTD, own-occ then any-occ — non-occupational and coordinated with workers' compensation (the state-mandated, primary coverage for job injuries) and SSDI. Taxation follows the untaxed dollar: individual after-tax premiums → tax-free benefits; employer-paid or pre-tax group premiums → taxable benefits; after-tax employee share → that slice tax-free; SSDI partly taxable above $25K/$32K; workers' comp tax-free.
One rule replaces the whole tax table: whoever escaped tax on the premium pays tax on the benefit.
Check yourself
Group disability income benefits are best described as
How sure are you?
Group DI = non-occupational and coordinated (reduced by workers' comp/SSDI). INDIVIDUAL policies are the occupational, non-coordinated ones.
Check yourself
Which concept does this describe? State-mandated liability insurance paying medical, disability, and survivor benefits for work-related injuries and occupational disease — wage-based up to a state maximum. Classifies disabilities as temporary or permanent, total or partial. It is PRIMARY for occupational losses: group DI and social insurance benefits coordinate with (are reduced by) it.
Close your eyes for a moment, then write everything you remember from this chapter — rules, numbers, traps. Recalling first is worth more than rereading.
Recall captured. Compare it against the summary below.
Four products, four wallets: BOE → the business's bills · buy-out → the departing owner's shares · key person → the firm's lost value · credit → the lender.